When at the checkout line and a clerk asks, “debit or credit?” I have only one answer: credit. There are a number of reasons I never make debit card purchases — security, peace of mind, rewards — but perhaps the biggest reason is that I’ve learned how to use my credit card like a debit card.
I pay credit card balances in full every month and never spend more than I can afford, thereby eliminating interest from the equation and ultimately eliminating the need to use a debit card at all.
While being debit card-free has great advantages, particularly because I earn between 2 and 6 percent in credit card rewards on everything I purchase, it wasn’t easy learning how to use credit cards like debit cards, and because of the temptation to overspend, ditching debit cards altogether might not work for everyone.
For those who alternate between credit and debit cards, here are five situations when you should always choose credit.
1. Online Purchases
Debit cards offer similar protections as credit cards. Under the Federal Reserve’s Regulation E, the maximum liability for debit card fraud is $50, just as it is with credit cards.
However, dealing with fraudulent debit card purchases is not as simple as dealing with online credit card fraud. If a debit card number is compromised, it can leave a cardholder with no available cash while the issue is being worked out by the bank. If the same problem happens with credit card purchases, a new credit card can usually be mailed to cardholders overnight. Also the time frame of its absence is a factor for debit cards. The longer it’s missing before you report it, the greater your liability, whereas credit cards are usually liability free regardless.
While many gas stations offer lower prices for debit and cash transactions, purchasing gas with a debit card typically leads to a short-term monetary hold of $50 to $100 that can last a few hours (or possibly overnight). This hold can cause issues for consumers with very low balances, especially if it leads to overdraft incidents from outstanding checks, or prevents additional debit card purchases until the hold is released.
Hotels, like gas stations, place monetary holds on debit cards. At a hotel, a hold of $100 to $200 is typically applied, often in addition to the hotel cost. Once again, this can cause issues for those who carry low balances, which is why charging this purchase on a credit card is recommended.
4. Large Purchases
Unlike with a credit card, consumers are typically unable to stop payment on a defective item purchased with a debit card. So a person who spends $1,500 on a defective television with a debit card will be forced to wait until he can resolve the matter with the merchant before getting his money returned or be issued a replacement television. To make matters worse, if no agreement can be made, the debit card holder is stuck with the defective item.
With a credit card, the same consumer can get the situation remedied almost immediately without losing access to the $1,500 spent on the TV or running the risk of being stuck with a bogus item. Additionally, American Express, Visa Signature and World MasterCard credit cards all offer various forms of purchase protection that insure cardholders against these type of issues to begin with.
5. Dubious Places
Since dealing with fraudulent credit card purchases is significantly easier than dealing with debit card fraud, you should never use a debit card at any establishment that appears questionable. It could be a brand name gas station, a convenience store, a chain restaurant — essentially any place that looks dubious should be treated as such, so if you think the ATM card insert area looks strange, use cash or a credit card instead.
Ultimately, consumers who have the self-control and credit limits needed to use credit cards as their go-to payment sources should avoid paying with debit cards altogether. Credit cards offer great security, better fraud support, allow cardholders to earn valuable credit card rewards and cost nothing to use, as long as all purchases are paid in full every month.
Those who aren’t fully ready to make the switch to a credit card-only lifestyle shouldn’t be overly concerned; simply being informed about monetary holds that can impact balances and the dearth of protection available relative to credit cards should be considered whenever you have a choice between using a debit card vs. credit card.
Jeffrey Weber has written about the credit card industry since 2004. You can read more articles by him at www.smartbalancetransfers.com.
Photo credit: Philip Taylor